Qualtek Services ($QTEK) - US infrastructure builder

[kettunen]

QualTek Services Inc ($QTEK) is a US market-focused infrastructure builder. Its targets include wireless networks, towers, 5G base stations, etc. Another significant part of its business is fiber network installations. Smaller but faster-growing segments include renewable energy infrastructure construction and emergency logistics, and more recently, radio network consulting.

Background

Listed via a SPAC merger on February 15, 2022.

Several acquisitions in 2021, e.g.:
https://qualtekservices.com/News/1013/qualtek-expands-wireless-services-segment-with-acquisition-of-vinculums
https://qualtekservices.com/News/1014/qualtek-expands-northeast-presence-with-acquisition-of-aerial-wireless-services
https://qualtekservices.com/News/1007/qualtek-acquires-fiber-network-solutions-a-premier-provider-of-fiber-optic-and-e

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Wireless and fiber networks account for 80% of revenue.

Renewable energy construction accounts for 10% of revenue.

Recovery Logistics accounts for 10% of revenue.

Additionally, there’s a new segment called SiteSafe, which provides consulting services related to radio networks:
https://qualtekservices.com/Services/RF-Compliance

More detailed description of services:
https://qualtekservices.com/Services/

Investor Presentation 06/2021 - before the merger and listing

https://s28.q4cdn.com/373154485/files/doc_presentation/2020/06/ROCR.QualTek-Investor-Presentation.pdf

This material should be viewed with caution, as changes have occurred, and not all capital was secured in the merger. However, the PIPE (private investment in public equity) and unsecured convertible bonds brought in a significant amount of capital.

“2021 was a critical year for the company. We successfully closed our SPAC transaction creating over $80 million of additional liquidity to allow us to execute on our strategic growth plan.”

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2021 and Q4 Results

https://investors.qualtekservices.com/investors/news/news-details/2022/QualTek-Announces-Fourth-Quarter-and-Annual-2021-Financial-Results/default.aspx

For the Fourth Quarter 2021:

Fourth quarter 2021 revenue was up 11.0% to $147.1 million, compared to $132.4 million for the fourth quarter of 2020. Net loss from continuing operations for the fourth quarter 2021 was $81.1 million compared to net loss from continuing operations of $56.3 million in the fourth quarter of 2020. Excluding one-time impairment of goodwill, Net loss from continuing operations for the fourth quarter 2021 was $28.6 million compared to a net loss from continuing operations of $27.5 million in the fourth quarter of 2020. Fourth quarter 2021 adjusted EBITDA was $4.0 million compared to a loss of $13.5 million for the fourth quarter of 2020. Backlog at the end of the fourth quarter was $2.1 billion which is a 22% increase over the fourth quarter 2020.

For the Full Year 2021:

Full year 2021 revenue was $612.2 million, a decline of 6.7% from $656.5 million for the full year 2020. Net loss from continuing operations for 2021 was $101.6 million compared to net loss from continuing operations of $94.2 million in 2020. Excluding one-time impairment of goodwill, Net loss from continuing operations for 2021 improved to $49.1 million compared to a net loss from continuing operations of $65.4 million in 2020. Full year 2021 adjusted EBITDA increased 356.9% to $60.0 million, compared to $13.1 million for the full year 2020. The increase in adjusted EBITDA was driven primarily by margin improvement initiatives across both the Telecom and Renewables & Recovery segments. On a pro-forma basis, assuming the recently closed acquisitions had been owned for the full year ending December 31, 2021, QualTek estimates adjusted EBITDA would be approximately 72.0 million. For the full year 2022, guidance remains unchanged.

The company is issuing fiscal year 2022 adjusted EBITDA guidance of $100-$120M

S1-filing, which contains all essential information about the merger. I have not thoroughly reviewed it. It includes ROCR (Roth Acquisition III SPAC).

986e0d5f-7757-47f0-a02f-90b992661160.pdf

[kettunen]

Why should this be interesting now, or why did I even start digging into an infrastructure builder in the US market?

QualTek, as an infrastructure builder, caught my eye last summer with all sorts of aid packages when the merger was first announced. Briefly about this in the SPAC thread:

SPAC merger companies - vaihtoehto IPOlle

@tedmel reminded me of this a few weeks ago. I took a small tracking position then to keep my interest up.

SPAC merger companies - vaihtoehto IPOlle

Let’s start evaluating the future, however, with the 24-month backlog, which is $2.1 billion. This is more than 3x the 2021 revenue.

Reported 24-month backlog at the end of Q4 2021 was $2.1 Billion, an increase of 22.0% over year end 2020

So, the valuation is really cheap, if the forecasts are met. This is, of course, still very unclear, and especially with SPAC mergers, there have been challenges

source: marketscreener

EV/Sales 0.08 ! Market Cap / Sales approx. 0.1 (Edit: numbers checked)
EV/Sales approximately 0.9-1.0. Awaiting updated figures.

It is noteworthy, however, that significant losses are hidden in parentheses, in the American style. Marketscreener shows the numbers more familiarly as negative.

Let’s also include analyst estimates, although compared to Inderes’s quality, these should be viewed with considerable criticism.

Disclaimer:
- I have a small tracking position, currently getting acquainted, and further help is needed
- deSPAC (De-Special Purpose Acquisition Company) companies carry a higher risk than many other targets
- Many acquisitions, which adds to the risk in addition to the potential

[kettunen]

The valuation in relation to revenue and backlog is largely explained by the large debt load. Listing through a SPAC (Special Purpose Acquisition Company) was specifically sought as a solution to this, with the aim of securing guaranteed capital at the time of listing with reasonable costs.

The redemption rate was almost 100%. High redemption rates have been more the rule than the exception for SPACs since spring 2021. So, the fund did not fully meet its targets, but with PIPE (Private Investment in Public Equity) financing and a separate convertible notes issuance agreement, most of the target was achieved, though not entirely. In addition, the interest rate on the convertible notes is apparently high (9.00%-11.25%), but their redemption level was probably at its lowest at $6.00. The current price is around $2.7.

More details on that arrangement:

Roth CH Acquisition III Co (Form: 8-K, Received: 01/14/2022 17:16:27)

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From the investor presentation

The SPAC fund’s share of $115M was therefore not received, so the boost to the balance sheet was only half-achieved.

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Comments on the post-merger situation:

QualTek LLC -- De-SPAC transaction improves QualTek's liquidity, but debt...

Moreover, delivering quality projects on time and within budget will be key to more consistent earnings at QualTek.QualTek’s rating remains constrained by its high debt leverage, with adjusted debt/EBITDA close to 7x, after its convertible notes issuance.

QualTek continues to pursue bolt-on acquisitions that will increase the company’s scale and diversity, but also keep its execution risks high. The company has completed a number of acquisitions in the last 12 to 18 months and will continue to do so with the proceeds from the transactions. Although business acquisition is consistent with QualTek’s strategy to meet the growing demand for infrastructure services to the 5G wireless, telecom, and renewable energy sectors across North America, the company’s ability to achieve target earnings remains to be seen given the short business track record and limited disclosure of the newly acquired businesses

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EBITDA broken down, illustrates well not only large debt servicing costs but also impairment of goodwill arising from acquisitions.

Source SEC FORM 8-K/A: https://d18rn0p25nwr6d.cloudfront.net/CIK-0001839412/ec88c76f-c44d-4e73-b258-d315f9001206.pdf

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In summary, it should be reiterated that this large backlog must turn into profitable operations so that debts can be paid off and cash flow can be improved. The capital received through the SPAC will help for at least another year, although some of it will likely still be used for acquisitions and inorganic growth.

Potentially new financing will be needed in the future, so it is good to prepare for ownership dilution. At the current valuation, I believe this has already been priced in.

In any case, QualTek is still under many monitoring radars; it’s a recent listing, the annual report is still awaited, as is updated investor material.

[kettunen]

Let’s continue now, with some more material from the 1.4.2022 release

https://s28.q4cdn.com/373154485/files/doc_presentation/2022/03/QualTek-Q4-Preso-V-FINAL.pdf

The number of shares in all services does not correspond to the actual amount due to the SPAC merger. This also causes discrepancies in reported valuations

So the total number of shares is 51.11M pcs, compared to the previously reported 21.57M pcs before the merger.

Debts

So Enterprise Value / Revenue is about 1 or slightly less, once we get the revised figures.

Considering the risk profile and balance sheet, it is no longer as undervalued as one might have previously assumed.

[kettunen]

10K or Annual Report published
Note: the figures are still from the SPAC era in 2021, i.e. ROCR figures. The merger was only on 14.2.2022, so more accurate figures will only be available after Q1. The annual report and business description primarily relate to QualTek’s operations.

b3642bda-aca2-4736-a895-98b2be030693.pdf

Description of operations in the company’s own words

Overview
We are a technology-driven, leading provider of communications infrastructure services, power grid modernization, and renewables solutions to the North American telecommunications and utilities industries. We provide a variety of mission-critical services across the telecom and renewable energy value chain, including wireline and fiber optic terminations, wireless, fiber-to-the-home, or FTTH, and customer fulfillment activities. Our experienced management team has leveraged our technical expertise, rigorous quality and safety standards, and execution track record to establish and maintain long-standing relationships with blue-chip customers.

We operate out of two business segments: Telecom and Renewables & Recovery Logistics. Telecom consists of wireless, wireline, and power, which represented 81% of our revenues for the fiscal year ending December 31, 2021. We entered the renewable infrastructure sector with our acquisition of Fiber Network Solutions, LLC (“FNS”) in January 2021, which represented 5% of our revenues for the fiscal year ending December 31, 2021. Recovery Logistics represented 14% of our revenues for the fiscal year ending December 31, 2021.

Telecommunications
We provide a full suite of services to the telecom sector across both the wireless and wireline markets, from site acquisition and permitting to initial engineering and design to installation, maintenance, program management and fulfillment. Our core offerings consist of:

• Engineering and construction services including the design and construction of aerial and underground fiber optic and coaxial systems for homes, businesses, cell towers, and small cells.
• Installation services including the placement and splicing of fiber and coaxial cable, in addition to upgrades and new site builds for cellular towers.
• Site acquisition services to determine the location for new sites prior to new site builds.
• We also provide cable and satellite fulfillment services for residential and commercial customers. These services are provided for telecom companies in connection with the maintenance or expansion of new and existing networks.

While the telecommunications industry is naturally concentrated, we maintain customer diversification across our business segments. We have numerous long-established relationships with telephone companies, wireless carriers, multiple cable system operators and electric utilities companies, which have been built upon and cultivated through numerous Master Service Agreements (“MSAs”) that extend for periods of one or more years (majority are for three or more years, some of which have auto-renewal provisions). Blue-chip, investment grade customers including AT&T, Verizon, COX Communications, T-Mobile, Spectrum, and Comcast comprise a substantial portion of our revenue.

Within our Telecommunications segment we also provide electrical contracting, and utility construction and maintenance services. We
construct and maintain overhead and underground distribution systems for municipalities, electric membership cooperatives, and electricutility companies.

Renewables and Recovery Logistics
We entered the renewable infrastructure sector with our acquisition of FNS in January 2021. FNS is a full-service provider of fiber optic and electrical services, focusing primarily on renewable energy projects. Our capabilities in the space include expertise in wind and solar farm fiber, installation, and testing, optical ground wire (“OPGW”) & all-dielectric self-supporting, or ADSS, aerial transmission line installation, and large-scale data com solutions and installation.

In serving our customers, we provide fiber optic terminations, optical time domain reflectometer (“OTDR”) and power meter testing, fusion splicing, fiber placement, extensive fiber optic and copper infrastructure installation, cable jetting, boring and trenching, industry specific maintenance and material procurement.

We also provide business continuity and disaster relief services to telecommunications and power utility companies, as well as businessas-usual, or BAU, services such as generator storage and repair and cell maintenance services.

macro background

Significant support packages for renewables

The Biden administration is expected to amplify this increase in spending for renewable power projects. For example, since his first day in office, President Biden has rejoined the 2015 Paris Agreement, committed to investing $400 billion in the next ten years in clean energy and innovation, and set a goal to achieve a carbon pollution-free power sector by 2035. We believe that this will translate into significant government spending in renewables to meet this goal, and also government regulations and policies that promote spending in the renewables space across various sectors of the economy. We believe that the Biden administration’s commitment to renewable energy will create ripple effects across the nation and ultimately lead to more opportunities for us to expand our business with customers.

In network installations, operators are constantly increasing investments in infrastructure

Regarding backlogs, it should be noted that the majority are under MSA (Master Service Agreement) and are also cancellable, so not completely binding. The amount is based on previous experience with similar projects

Backlog
Our backlog consists of the estimated amount of revenue we expect to realize from future work on uncompleted contracts, including new contracts under which work has not begun, as well as revenue from change orders and renewal options. A significant portion of our 24- month backlog is attributable to MSAs and other service agreements, none of which require our customers to purchase a minimum amount of services and are cancelable on short or no advance notice. Backlog amounts are determined based on estimates that incorporate historical trends, anticipated seasonal impacts, experience from similar projects and estimates of customer demand based on communications with our customers.

[kettunen]

Let’s continue monitoring after the Q1 figures are out and better than expected. Of course, there’s still a long way to go to profitable business.

https://investors.qualtekservices.com/investors/news/news-details/2022/QualTek-Announces-First-Quarter-2022-Financial-Results/default.aspx

However, there are opportunities, many areas with potential and growth.

Recent investor materials and Q1 results

fd588059-ac6a-4cf9-8f3a-93496b3390a9.pdf

Significant scaling is needed to turn profitable, or new operations must have better margins. The current gross margin is around 10%. Subtracting all other costs from that, it’s difficult to make a profit. Partially, merger and listing costs are to blame for increased other expenses, but it doesn’t remove the fundamental problem.

The increase in Net loss in 2022 is primarily due to transaction and public company readiness costs along with stock compensation and other one-time expenses associated with the public transaction. First quarter 2022 adjusted EBITDA was $4.0 million compared to $2.9 million, inclusive of discontinued Canadian operations, for the first quarter of 2021, a 38% increase. Backlog at the end of the first quarter 2022 was $2.2 billion, up from year-end 2021 of $2.1 billion. Guidance for the year remains unchanged.

For the Renewables & Recovery segment, profitability, at least in terms of Adjusted EBITDA figures, is clearly better, at about ~30%. In the Telecom segment, the corresponding figure is under 4%.

[kettunen]

A more bullish view on infrastructure builders, Qualtek in particular

https://seekingalpha.com/article/4527107-5g-rollout-underway-qualtek-most-potential-upside

Q2 Earnings are to be announced Monday, August 8, 2022 after COB. Since the company went public in February, it has been SPAC smashed as the market has switched to risk off. Hurricane season is in full swing and QualTek’s recovery logistics line of business profits from rebuilding after hurricanes. The $2.2B 24 month backlog is worth $200M in EBITDA across the next two years by my rough napkin math. The market capitalization is $31M and there is $485M in debt and the company’s last quarter of EBITDA was a measly $4M on $148M of revenue, but business is seasonal and Q2 and Q3 are their bigger quarters.

During hurricane season, these Recovery Services are apparently profitable for Qualtek
https://www.qualtekservices.com/Services/Recovery-Logistics

Based on the comments, margins should improve, which is also a prerequisite for operational sustainability. The second half of the year should also be stronger. Other risks still remain, but there is also potential, if the backlog can be converted into revenue, and preferably with better margins than before.

Edit: I don’t immediately see it as a $10 stock, unless margins jump significantly. But from the current price, there should be reasonable upside, but it also requires execution.

[kettunen]

Q2 out

5d813637-06de-4632-aa09-08712a15d719.pdf

The direction is starting to be right, but the journey to positive is still long

Scott Hisey, QualTek’s Chief Executive Officer, said “We continue to experience unprecedented demand for our services. In this past quarter, we recorded the highest second quarter revenue in the Company’s history, up 41% year-over-year. It’s important to note that 96% of revenue was generated under Master Service Agreements. This growth, coupled with our estimated $2.3 billion backlog, has positioned QualTek to capitalize on what we continue to believe will be the largest telecommunications 5G and fiber builds in our nation’s history.”

There is demand, but pricing could be improved.

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Edit: added transcript and a couple of excerpts

https://seekingalpha.com/article/4534032-qualtek-services-inc-qtek-ceo-scott-hisey-on-q2-2022-results-earnings-call-transcript

From a working capital perspective, we expect our working capital build to level out in the middle of the third quarter and the business turning cash flow positive for the back half of the year. Net loss from operations was $25.6 million compared to a net loss of $21.8 million in the second quarter 2021. The increase in net loss in 2022 is primarily due to expenses related to operating as a public company, share-based compensation expense and one-time public company readiness cost not in the year ago period.

“So as we reported, we ended the quarter with $71 million drawn on our line of credit. And as I mentioned, we’re at peak working capital right now. So the back half of the year, as things start to level out, we’ll be cash flow positive. And we expect some of that working capital to come in, in Q4”

And during Q2 call, I let everyone know that we’re going to operate through Q3 and give guidance after Q3. It’s very important that we establish real credibility with everyone, and we want to make sure that when we go out with that first guidance after going public that we nail this and get it down to the right number. So we feel running through Q3.

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R.I.P

QualTek Services Inc. Receives Nasdaq Delisting Notice